View: Valuation is temporary, but dilution is permanent; know about non-dilutive funding solutions

To build a successful start-up and stay competitive in the market, business growth is of paramount importance. However, it calls for continuous investment in the game.

While building on a company’s profits may sound like the safest idea, the rapidly changing market dynamics, with new players joining every day, don’t allow founders the privilege of time to follow the "generate and scale" model.

Entrepreneurs look for alternative models of investment, and venture capital turns out to be the more popular and glamorous option for founders, but it comes with its own set of drawbacks — relinquishing stake and authority in decision-making to investors.

Despite this, investment via venture capital is perceived as a goldmine for the growth prospects of a business. In fact, Indian start-ups raised approximately $42 billion in investments across 1,000+ funding deals in 2021.

While diluting equity may appeal as the most relevant prospect during the conception and beginning stages of a business, it may not be the most optimal option as the success story of a business hits off.

The modus operandi of equity financing is built upon giving the Venture Capital (VC) firms a certain portion of their ownership in the company. The VCs, in exchange, invest the money required to scale the business.

The money raised can be used to achieve a short-term need to fund working capital or accomplish long-term goals like building new products. This is a great option in the early funding stages for product development or to build the minimum viable version of a product.

Equity funding helps to set things in motion so that the company can get the first few customers and refine the product’s fit for the market as per customer feedback. These activities demand a lot of time and capital success. Such risks are borne by the equity investor who is willing to take them for potentially outlier returns on their capital.

By choosing VC funding, a business owner is effectively selling their ownership in their company in exchange for cash. Apart from losing ownership, diluting equity in the company to raise capital will pave the way for other stakeholders to enter the firm who may have different visions for the business. While the investment might enable founders to push for aggressive growth, in some cases, the conflict could make your business lose the organic track you set it on.

Still, many founders today are willing to take that risk to raise the capital for their businesses. It’s become a norm to celebrate investment rounds (and not actual business milestones).

This equity boost will definitely provide short-term benefits to a company. In the long term, however, the investor will amass more wealth. The VC investing category and private equity sector witnessed 151 exit deals alone in 2020, with an estimated outgoing capital worth $6 billion.

The start-up landscape is evolving rapidly, and there is a growing need for a founder-friendly alternative method of raising capital beyond the options of traditional debt and equity dilution. Several fintech start-ups have recognised this gap and have come up with a solution in the form of Recurring Revenue Financing. The motive is simple - secure funding while allowing the authority to run a firm to remain in the hands of founders.

This new-age non-dilutive financing option provides an environment that doesn’t force the founders to relinquish their valuable stake and relegate their position to get the capital required for business growth. To them, the purpose is to democratise how capital is raised.

Proprietary algorithms of these companies enable eligible businesses to raise capital in a fair and just manner and eliminate the need for influential contacts to get funding. This new model arranges a level playing field for all founders.

Recurring Revenue financing options are quick, convenient, tech-led, and a high-probability solution for founders. The founders can secure and receive funding within days instead of waiting 3–12 months to see the cash with equity fundraisers. The swift fundraising process enables the founders to scale their businesses rapidly or take advantage of a relevant opportunity that may arise for a short window of time.

The unique mechanism of the Recurring Revenue financing model helps businesses convert their recurring revenue streams into upfront capital. They enable founders to get the lifetime value of their customers upfront, which helps founders to match their cash inflows with their CAC outflows. It is a flexible and accelerated way for the business to get a quick cash flow boost through non-dilutive funding. The best part of the deal is that the firm gets funding without charge creation, personal guarantees, or other restrictive financial covenants like traditional debt.

These financing platforms integrate with the accounting and invoicing software (like Zoho, QuickBooks, etc.) to automate the data collection process. The facilitator platform then examines the company’s financials and accounting data to determine a trading limit. Once this limit is set, the founder can trade futures contracts to raise funds instantly.

Since these alternative funding platforms are built using cutting-edge technology, founders have the luxury of withdrawing cash at the click of a button. Besides, founders get the liberty to choose the quantum of capital depending upon the kind of cash flow their company requires during the transaction.

This ‘ease of doing business' on alternative financing platforms comes with other merits as well. As the recurring revenue of the firms rises, so does their trading limit, ensuring that the funding amounts grow alongside the brand.

The goal is to help asset-light companies with recurring revenue streams by providing them with a flexible financing option. This gives them the space and liberty to grow on their own terms.

While Recurring Revenue Financing has a lot of merits, the solution is not meant to undermine the significance of VC funding. In fact, these models work well in conjunction with VC funding. Equity funding is perfect for longer payback projects where uncertain returns, whereas these non-dilutive funding options can be leveraged for expenses with shorter payback and predictable returns. So, if the capital has already been raised via equity financing or such a plan is in motion, the Recurring Revenue Financing platforms can seamlessly fit in with the capital stack.

Till January 2022, over 61,000 start-ups were active in the market. Most of them are likely to raise capital for their business growth. Unfortunately, statistics show that 94 percent of new businesses fail within a year of their launch. The scenario implores the start-up founders to look for new avenues of raising capital apart from traditional routes, which are reliable, fast, flexible, hassle-free and would lead to immediate growth. This earnest search could stop at the Recurring Revenue Financing model.